Restoration Hardware 2015 Annual Report Download - page 42

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Our gross profit may not be comparable to other specialty retailers, as some companies may not include all or a portion of the
costs related to their distribution network and store occupancy in calculating gross profit as we and many other retailers do, but instead
may include them in selling, general and administrative expenses. In addition, certain of our store leases are accounted for as build-to-
suit lease transactions which result in our recording a portion of our rent payments under these agreements in interest expense on the
consolidated statements of income.
Selling, General and Administrative Expenses. Selling, general and administrative expenses include all operating costs not
included in cost of goods sold. These expenses include all payroll and payroll related expenses, store expenses other than occupancy
and expenses related to many of our operations at our corporate headquarters, including utilities, depreciation and amortization, credit
card fees and marketing expense, which primarily includes Source Book production, mailing and print advertising costs. All store pre-
opening costs are included in selling, general and administrative expenses and are expensed as incurred. Selling, general and
administrative expenses as a percentage of net revenues are usually higher in lower-volume quarters and lower in higher-volume
quarters because a significant portion of the costs is relatively fixed.
Our recent revenue growth has been accompanied by increased selling, general and administrative expenses, excluding certain
one-time and non-cash items discussed in “Basis of Presentation and Results of Operations” below. The most significant components
of these increases are employment costs due to company growth and expansion, an increase in professional fees and other corporate
costs, an increase in corporate occupancy costs associated with our corporate office expansion and upgraded technology systems, as
well as an increase in credit card fees due to increased revenues. We expect certain of these expenses to continue to increase as we
continue to open new stores, develop new product categories and otherwise grow our business.
Adjusted Net Income. We believe that adjusted net income is a useful measure of operating performance, as the adjustments
eliminate non-recurring and other items that are not reflective of underlying business performance, facilitate a comparison of our
operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and
trends affecting our business. We also use adjusted net income as one of the primary methods for planning and forecasting overall
expected performance and for evaluating on a quarterly and annual basis actual results against such expectations.
We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that
we do not consider representative of our ongoing operating performance.
Comparable Brand Revenue. We believe that comparable brand revenue is a meaningful and relevant non-GAAP metric to
evaluate period-to-period changes in net revenue performance given the integrated multi-channel nature of our business, the synergies
between our retail stores, websites and Source Books, and the fact that customers shop across all of these channels.
Comparable brand revenue growth includes retail comparable store sales, including RH Baby & Child and RH Modern
Galleries, and direct net revenues. Comparable brand revenue growth excludes retail non-comparable store sales, closed store sales
and outlet store net revenues. Comparable store sales have been calculated based upon retail stores, excluding outlet stores, that were
open at least fourteen full months as of the end of the reporting period and did not change square footage by more than 20% between
periods. If a store is closed for seven days during a month, that month will be excluded from comparable store sales.
As the comparable brand revenue metric includes changes in retail store net revenues (i.e. comparable store sales) on a period-
to-period basis and also incorporates changes in net revenues resulting from Source Book and websites sales, we believe this metric
provides better information to investors in terms of evaluating our business performance and a better basis to compare performance to
that of key competitors.